Below is the Blackberry Ltd (NASDAQ:BBRY) Third Quarter Fiscal 2015 earnings conference call transcript. Prem Watsa, Nelson Obus, and Kahn Brothers are the biggest holders of Blackberry Ltd (NASDAQ:BBRY) among the 700+ hedge funds and investors tracked by Insider Monkey.
Company Representatives
John S. Chen – Executive Chairman of the Board, Chief Executive Officer, Blackberry Ltd (NASDAQ:BBRY).
James Yersh — Chief Financial Officer, Blackberry Ltd (NASDAQ:BBRY).
Analysts
Tim Long – Managing Director, BMO Capital Markets
Colin Gillis – Senior Technology Analyst, BGC Partners
Maynard Um – Senior Equity Research Analyst – IT Hardware, Wells Fargo
Ehud Gelblum – Managing Director and Head of US Tech Research, Citigroup
Simona Jankowski – Senior Equity Research Analyst, Global Investment Research, Goldman Sachs
Mark Sue – Managing Director at RBC Capital Markets
Rod Hall – Senior Analyst, Data Networking/Wireline/Wireless Equity Research at JP Morgan Chase
Amitabh Passi – Senior Research Analyst at UBS Investment Bank
Richard Tse – Technology Analyst at Cormark Securities
Operator
Good day and welcome to the Blackberry Ltd (NASDAQ:BBRY) Third Quarter Results Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to John Chen, CEO of BlackBerry. Please go ahead sir.
John S. Chen, Executive Chairman of the Board, Chief Executive Officer, Blackberry Ltd (NASDAQ:BBRY).
Thank you. Thank you very much and good morning everybody and welcome. And before we start I’m going to turn over to Joe for the Safe Harbor language.
Joe (Not formally identified during the call)
Thank you, John. So after I read our cautionary note regarding forward-looking statements, John will provide a Business Update and James Yersh will then review the Third Quarter Results.
We will then open up the call for questions. Our Q&A will be slightly shorter today given pre existing commitments. In order to let as many people as possible ask questions, please limit yourself to one question.
The call is available to the general public via call in numbers and via webcast in the investor relations section at blackberry.com. The webcast can be accessed through your BlackBerry 10 smartphone, your personal computer or your BlackBerry PlayBook tablet. A replay of the webcast will also be available on the blackberry.com website.
Some of the statements we will be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 and Canadian Securities Laws.
We will indicate forward-looking statements by using words such as expect, plan, anticipate, estimate, may, will, should, forecast, intend, believe, continue and similar expressions.
Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the company believes are appropriate in the circumstances.
Many factors could cause the company’s actual results, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements, including the risk factors relating to the company that are discussed in the Risk Factors section of our Annual Information Form, which is included in the company’s annual report on Form 40-F and the company’s MD&A, copies of which filings may be obtained at www.blackberry.com.
These factors should be considered carefully and you should not place undue reliance on the company’s forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
I will now turn the call over to John.
John S. Chen,
Thank you, Joe. Well I’m sure you have the results in front of you and again I welcome you all to our call here. I and together with my team are extremely pleased with the management of our finances. We turned in a penny ($0.01) on a non-GAAP profit and a positive cash flow from operation of $43 million for the first time in two years.
Operating expenses and margins were managed extremely well, while we were able to launch and deliver very important new products. I will get into that a little later, the detail of those products.
We expect to remain cash flow positive and continue to expect to achieve sustainable profitability sometime in the FY16 time frame.
Now that the team has a pretty good handle on content margin, I myself and a number of our senior executives are spending most of our time on improving and expanding our distribution.
It is my belief that we can grow and stabilize the revenue or stabilize and grow the revenue of the company in FY16 and while we will make every attempt to stay profitable going forward, sustainable profitability could only come from revenue growth and that is certainly our strategy here.
To see this revenue growth, we probably need a couple of quarters and I will explain that a little later. One of the things that we already done is to have — has been aligning internal resources to support the field and a couple of hundred employees have been commissioned into the field to drive this — to help drive this growth.
I see about one more transition — we call it a transition quarters, the one that you just saw in Q3 — in terms of revenue as we ramp up the volume in Classic, which we just announced, followed by revenue stabilizing and sequential growth sometime in FY16 as some of our investments start to gain traction.
I’d like to spend a few minutes on the revenue side. It is a number that obviously to us is not satisfying. We understand the makeup of the number and as we all said in a number of times our focus have always been in this year of our margin and cash flow.
We achieved that but now we’re going to turn our attention to revenue. So to give you a little bit of color on the revenue, on the hardware side the quarter was pretty much entirely focused on clearing out our old inventory. I’ll give you some stat, the numbers behind it.
This obviously weighted on the ASP of the quarter. Going forward, because of the new products, we expect the ASP to start picking back up again.
We’re able to fulfill about 200,000 Passport orders that was pre-ordered at the time we announced it, while reducing the manufacturing lead times to roughly now between four to six weeks.
However, because we have sold out or stock out a number of times in the quarter waiting for the fulfillment, we were only able to fulfill order backlog of Q3 by December 12. So that was clearly already into Q4.
And I also want to remind everybody that our revenue of these devices are all recognized on a sell-through basis. So not every one of those units, in fact most of those units revenue are not recognized in Q3. And we obviously will recognize as they lead up in throughout the next few quarters.
I spoke about inventory — cleaning out old inventory. I’m very pleased to announce that or to report that our inventory level, on the old inventory, old device inventory level is down 93% year-over-year since the 13 months that this team have taken over.
So now literally, we have very few prior devices left that we could provide. Despite all these, we achieved our second quarter in a row with positive hardware gross margin. And so that’s the old products and where our focus is in.
And then of course we just launched our Classic. I could report the fact that the Classic has been extremely well-received. The orders are ahead of where the Passport was at the time of the launch a few months ago.
Finally we did turn away a number of, I would call, low margin and simply negative margin deals in the quarter and we will continue to do that, by the way as a practice going forward. We will not do deals that we know the margins are hurting to our bottom line.
Moving onto the SAF, the SAF revenue was down about 13% quarter-over-quarter, which pretty much in the middle of the range that we expected. With the launch of the Classic we are modeling a little bit more aggressive SAF decline, which is no different from what we have shown you in San Francisco on November 12 which was the modeling a 15% sequential decline.
On software, recall that the Enterprise Software product we released in November, which I just referred to, and the typical enterprise software sale cycles are roughly about six to nine months.
For the Enterprise, however we have seen the BES 12 gain a lot of traction and partly because of the EZ program, EZ Pass program that we had in placed and the beta program we have placed and we already have made a number of very notable wins to date, for that matter. I’ll report on some of the names later.
Now on update to our progress in returning to the growth part of the story, first on the device side, on the device side on the Passport was successfully rolled out to 48 different countries in the last couple of months, including Canada, U.S., South Africa, Saudi Arabia and India. North America and Europe account for 61% of the Passport sales.
On the Z3 that we rolled out about maybe 10 – 11 months ago, it is still going reasonably strong and has been rolled out to over 54 countries to date, total. We continue to see a reasonable demand for this product, at least for the next couple of quarters, two to three quarters.
Lastly we have referred to the Classic that launched a few days ago. As I reported we have very strong support and traction of the product. People like it. We have also very strong support from the operators on a worldwide basis.
So initially the carriers that have the Classic at the retail stores, so this is, as those of you that follow us reasonably closely that this has not been something that we have enjoyed for a while.
So there are a number of carriers that have put us on their retail stores, including AT&T, Rogers, Bell, Telus, Deutsche Telekom, Orange, Telefonica, Singtel, China Mobile and more as well as many local operators in Europe, Africa and Middle East. The list will expand. We are working on that aggressively right now.
We have a pretty strong device road map going forward and we will discuss this at the Mobile World Congress in March. So I invite you to make sure you don’t miss that. I think you will find that interesting and exciting.
I’d like to move to the Enterprise Software side, BES 12 and our value-added solutions, services solution launched last month. We are committed to making the BES 12 the leader in the cross-platform EMM — the Enterprise Mobility Management segment.
This commitment is highlighted with our support for the Samsung KNOX solutions. In fact I wasn’t able to stay, I understand from my colleagues that there was a pretty good reception at the NASDAQ when we have a joint event with Samsung in New York just Wednesday?
The one that we saw, James Yersh have been seven-storey tall. Unfortunately I had to attend — come by to attend a Board meeting.
Anyway, this commitment is highlighted with our support of the Samsung Knox that we talked about. And we also made two major announcements today to reinforce our cross platform commitment.
The first we are pleased to announce the support of Lollipop, the codename version of the latest Android. I guess it’s known as the L Series?
Second we are pleased to announce that Boeing is collaborating with BlackBerry to provide secure mobile solution for Android devices utilizing our BES 12 platform.
That by the way is all they allow me to say. So sorry it seems like I am reading it word for word. I am committed and my — I’m true to my commitment here.
Okay we believe this cross-platform message is resonating with customers, I will give you some wins. Just a month into the BES 12 release we announced or we are pleased to announce that firms all around the world such as Tata Energy, McKenzie Health, Bombardier the trusted source of unit of Unit Automatic in Singapore and more have decided to go with the BES 12. And these are wins that we already recorded.
And then in addition to that Ocean Capital Investment — which is an affiliated unit of Irving Oil — is moving away from MobileIron and will be our first BES 12 hosted customers. Air Canada has also been testing our BES 12 hosted solution and is planning to deploy it.
So that’s already a number of wins and I am sure the wins obviously we have a longer list of that but I think I’ll just stop right there.
We have a successful BES 12 beta program with 89 customers already fully-deployed, only one month after we launched our BES 12. 174 more beta customers have planned to roll out the BES 12 within the next 12 months.
And by the way of all these beta customers 70% of that, of the number of the beta customers, are on mixed OS environment. That means that they are cross platform, managing Windows and iOS devices and Android devices in addition to BlackBerry devices.
Our BES 12 seating program — the EZ Pass — now has over 4,900 total customer registrations, which is about 1,300 more than last quarter when we reported. As of today we have 6.8 million licenses turned in. 100% growth over last quarter. So very, very well received. Of these licenses about one-third were traded in from competitors.
With this uptake exceeding our goal, obviously somewhat way exceeded my goal, our attention is now turning to monetizing it for FY16. So we have decided to end the EZ Pass sign up at the end of this month, at the end of December.
Launch of the value-added services. On Wednesday when we launched our Classic in New York and Frankfurt and Singapore, we also launched two bundles.
First our secure productivity bundles, which include VPN solution, BBM Protected and Blend for $6 a user a month.
Second, the second bundle is the Enterprise Communicator Bundle which includes the BBM Protected and BBM Meetings for $12 per user per month and I think some of you who have been to our launch event have seen the power of that and we have done a good demo.
Those of you who haven’t seen it and would like to see it, I’m sure that calling our team, we’ll make sure that we can arrange to show you that.
Lastly we successfully completed our acquisition of Secusmart, which is the encrypted voice solution — encrypted voice and encrypted text solutions in Germany, as well as Movirtu, which is a soft SIM company in UK.
On the distribution front, we also have made good progress and we’re going to make more of that. We are deploying our — as I pointed out earlier — our internal resources to boost our effort there already.
On the indirect channel side we have signed a couple of new agreements including Ingram Micro and Brightstar and they by the way are not only in the hardware side of the equation as well as the software side. They are reselling some of our software solutions.
Carrier, who had also agreed to resell our software included Vodafone, Verizon, China Mobile and India Idea Cellular and more. But we picked Airtel because they have pretty broad reach.
We are one of the first and the only company that we know of that provide the so-called enhanced SIM based licensing billings for the enterprise software and this means that software could be charged to the phone bill. And this will really facilitate how businesses does or do buy our software or use our software through carriers and our partners.
We are on that solution — the enhanced system-based licensing. We are now live with not only the Idea Cellular India but we’re also live with Vodafone in Germany. And then we of course we intend to roll out to more carriers in more countries over the next 12 months.
I’d like to spend a minute on the online side. We have been stepping up our effort on the online channels and this will be a strong continued focus of ours going forward.
There are now over a 170 websites selling our products around the world, in addition to our initial core of the Amazon and blackberry.com, we’ll have more on our way.
We have been doing very good business on both the Amazon as well as the BlackBerry and Amazon of course. You all know that it has stocked out a number of times so has blackberry.com. So receptivity has to be very strong.
We also have on the vertical partner side and application partner side we have expanded our ecosystem to embed some of our solutions in some of these partnerships like NantHealth, on the human genome projects, cancer research projects and Samsung, of course, we talked about helping each other on the KNOX space. Salesforce.com and more and stay tuned, there are more to come.
Last but not least I’d like to spend a minute on the BlackBerry Technology Solutions, that’s called BBM. I believe the investment that we made in our technology portfolio, which are devices, BES 12 messaging, BBM software, along with our very extensive carrier relationship, as well as the investment we already made in the security and infrastructure, will serve as probably the most industry most completed, as well as most integrated platform for managing and securing Internet of things platform, or the most completed IOT platform.
We are intending to review the platform roadmap, the IOT platform roadmap and the technology behind it, at our CES in January. Some of you I think already have the invitations from us and please do come and I think you’ll find that pretty exciting. I find it pretty exciting for the future.
You could also see how everything that we do actually integrate together as one and we certainly hope to see you there. And you will also see by the way the BBM road map in addition to the IOT road map.
So I’d now like to turn the call over to James who will provide you the detail and some color on the quarter.
James Yersh, Chief Financial Officer, BlackBerry Limited.
Okay, thanks John. I am going to start with a couple of financial highlights from the quarter. In the quarter we did have positive cash flow of $43 million, adjusting for items not part of normal operations, meaning that we achieved our first financial milestone that John and I started talking about a year ago.
In the quarter we also turned in a non-GAAP net profit of $6 million or $0.01 per share. These results were largely attributable to disciplined management of margins and expenses.
Now turning to the Income Statement.
Revenue for the third quarter was $793 million. Hardware represented 46% of revenue, the same as last quarter. We recognized revenue related to approximately 2 million devices in the third quarter consistent with the previous quarter.
Legacy BB10 and BBOS product inventory is down 93% year-over-year as John mentioned previously. ASP in the quarter was roughly $180 and we expect this to increase on the back of our new product releases.
Service revenue represented 46% of revenue, consistent with last quarter. Service access fees declined 13% compared to last quarter’s SAF revenue and we continue to model a SAF decline of approximately 15% for the next quarter. Software and other revenue represented 8% of revenue.
Both GAAP and non-GAAP gross margins were 51.7%. Hardware gross margins were positive for the second quarter in a row. We continue to model gross margins to be in the high 40% range for the next couple of quarters. Non-GAAP operating expenses were $394 million, down from $433 million last quarter.
GAAP operating expenses were $549 million and included in GAAP OpEx were $5 million of restructuring charges as well as the non-cash charge of $150 million for our convertible debt, which as I have explained in prior quarters, GAAP requires that we record a charge as the value of our debt increases. This is a non-cash charge, has no impact on our face value of the debt, on our liquidity, on our operations or cash flow.
In the quarter, amortization expense was $74 million. The GAAP tax recovery in the quarter was approximately 8%. GAAP net loss, which includes the impact of debt and restructuring was $148 million or $0.28 per share.
Now moving on to our Balance Sheet and Operating Working Capital Performance.
Our cash balance increased by $12 million quarter-over-quarter. Purchase obligations and other commitments amounted to approximately $1.6 billion relatively flat to last quarter.
Purchase orders with contract manufacturers represented approximately $565 million of the total. This is up 64% quarter-over-quarter due to our new product launches that will occur over the next couple of quarters.
These purchase commitments are still ramping up and are back-end loaded.
Total cash, cash equivalents and investments amounted to $3.1 billion.
Looking forward we expect to remain cash flow positive and continue to forecast a non-GAAP income statement profitability at some point during FY16.
That concludes my comments and I’ll send it back to John.
John Chen
Very good. Thank you. All right, operator, can help by polling the Q&A please. Hello? Operator?
Operator
Thank you. If you would like to ask a question, please signal by pressing Star 1 on your telephone keypad. If you’re using a speaker phone, please make sure your mute function is turned off to a lighter signal to reach your equipment. Again, press Star 1 to ask a question.
We’ll go first to Tim Long with BMO Capital Markets.
John Chen
Good morning Tim.
James Yersh
Good morning Tim.
Tim Long, Managing Director, BMO Capital Markets
Good morning guys. Two, if I could. Maybe, John for you, I know you said it, talked a little it takes a little while for the new software to run through the system and convert to revenues. Are you still thinking about this doubling of software revenues next year and maybe give us a sense what we should look at to start to see that number start to inflict more positive. Obviously the beta trials are good but what should we look at for conversion there?
And then maybe James on… it seems like the hardware gross margins were up pretty meaningfully in the quarter. Was there anything else in there and then just related to it when we start getting more Passports and particularly Classics, do you think that will wind up being accretive to that hardware gross margin? Thank you.
John Chen
Okay. So, Tim I’ll take the first one and James will take the second one as you pointed out.
So I think, first of all, yes, I am still on the path of doubling our software revenue the next year. So just to make sure we gone through the numbers correctly, today we talked to you about $250 million. That’s inclusive both licensing, license and technical support. We are expecting in our plan to double that numbers for next year.
I expect to see the monetization to start kicking in, in the second quarter, Q2. It’s roughly about a six to nine quarter thing. So you add it, you start it by a November time frame. I think by June of next year I should see some good traction.
James Yersh
Okay Tim and on the margin question, so I’ll acknowledge that yes, hardware margins did improve quarter-over-quarter. You used the word meaningfully, I think it did go up.
In terms of the pattern going forward, just remember as we go through Q4 and even into Q1, we have two things.
We have the new products which as you said should increase the more, make a bigger contribution to margins, but I also have deferred revenue coming off the balance sheet that’s going to have lower margins attached to it given where we were. As you can see from the ASP in the quarter for example that, that will be kind of an offsetting to that.
So I think your trend is right overtime, but it’s going to be a couple of quarters before we see the full impact of that.
Tim Long
Okay. Thank you.
James Yersh
Yes.
Operator
We’ll take Colin Gillis with BGC Financial Next.
John Chen
Hi Colin.
James Yersh
Good morning Colin.
Colin Gillis, Senior Technology Analyst, BGC Partners
Good morning guys! Can you update us John on the trends for handset discounts as the distribution channel evolves?
John Chen
Yeah normally the distribution channel is roughly about 25 to 30 points. And I don’t see a — well, first of all with our Passport and Classic, I don’t see any different trends, not accelerated.
I think the probably, behind your questions is about whether if you see acceleration of the discounting? I don’t really see the acceleration of discounting.
It seems to be moving pretty good that depending on where you buy it $499 – $599 Passport, $499-$599 and in some cases $699 for the red one.
And so we are planning on some modest discount but that’s no different from the normal the trend that we’re always seeing.
Colin Gillis
Perfect, thank you.
Operator
We’ll go next to Maynard Um with Wells Fargo.
Maynard Um, Senior Equity Research Analyst – IT Hardware, Wells Fargo
Congratulations on your profit and your cash flow.
John Chen
Thank you.
Maynard Um
A couple of questions though. Sustainable profits in fiscal 16, you’ve hit the profit here this quarter. You’ve got the Classic ramp coming despite the decline in the SAF revenue. I’m just curious does this imply that your spending in OpEx side will jump up materially due to the new launches?
And then separately John I just wanted to confirm that the run rate for software and the increase that we’re going to start to see in June of next year, is that run rate going to reflect the $500 million?
I’m just curious because I guess typically large enterprises won’t — don’t buy the first revision of the software. They wait for all the bugs to come out and then they sort of ramp in in small pilots and then ramp up overtime.
So I’m just curious if that ramp, the expectation should be that when we see that that will be a run rate to the $500 million or how do we think about that ramp in the June quarter. Thanks.
John Chen
That’s a good question, that’s an interesting question.
First of all, no, you should not expect to see expenses jump up. And even if it is jumped up, it is not because of launch activities. We have already paid for the launch activities. So you already seen it in Q3.
So now we will obviously manage it extremely, expenses extremely conservative. We’re not going to let this thing get ahead of its own headlight. I will make you that commitment.
You have a good point there. That is going to be a danger. On the $500 million run rate, that shouldn’t be too difficult to be really honest with you, because we have very, very deep pipeline right now.
The question is do we actually register $500 million of revenue in FY16 and that’s what I’m shooting for. I’m not only shooting for the run rate part. The run rate, of course that’s also a great achievement, there is no question about that. But I am hoping to do better than that.
But I take your point. By the way I have been in the software business for a long time. Regarding the piloting and this first, second version and all that, on BES 12 you could do some channel checks, the BES 12, it’s solid.
Maynard Um
Great, thank you.
John Chen
All right, thank you.
Operator
We’ll go next to Ehud Gelblum with Citi.
Ehud Gelblum
Hey guys, thank you. Good to see you over there so there quite a lot of activity this week.
A couple of questions. Just want to understand a couple of the moving parts in the quarter. The software, James, the software and other revenues seemed to fall this quarter.
Your other revenue line has always been kind of constant in the mid-teens, about $16 million last quarter. If you do that math on the software and other, this time you back into a software number that seems to have declined by a decent amount.
Was that a QNX decline and if you can give a little color into that? Or it’s a license or a software decline and just give us a sense as to kind of what happened with that?
And also the ASP is clearly, you shifted the number of units to 2 million. The ASP obviously fell, even with assuming 200,000 sort of a 10% of those were Passports, at a pretty high ASP.
The other ASP must have fallen too. If you can give us a sense as to, was that — I would have thought it would have a lot of Z3s that did that.
But John your commentary seemed to — maybe I misread it — but it sounded like Z3 wasn’t quite that strong in the quarter. So just want to understand what was it that really pushed that ASP down?
And then finally on the 6.9 EZ Pass subs. A really nice number that keeps growing. Can you give us a sense that if EZ Pass ends today, if nothing else happened and you stick with the 6.9 million EZ Pass subs and they stay on whatever plan they are, it would be good if you can give us a sense if they are Silver or what percentage of those are Gold, what type of revenue does that generate right after that, if you don’t get any more subs?
And then if we can get a modeling sense as to how that grows with each incremental sub you bring in. But assuming you just have the 6.9 million EZ Pass subs on your program going forward, once the program ends what does that generate on a monthly basis going forward right there. That would be really helpful. Thank you.
John Chen
Okay. There is a lot of questions here, but I will answer a couple and James also to maybe even augment the answers I have.
First off, the software line it’s not because of QNX. QNX is actually performing pretty good. It has to do with we are turning perpetual license to subscription based license. More so than anything else, it’s not so much of the volume of the business as the recognizing of the revenue of the business.
Let me jump to the last one, the EZ Pass one.
The model, first of all, I think you need to give us about a quarter so that we actually accumulate the actual experience because we are going to cut it off end of December and then we’re going to start converting people and then when they convert they pay us T-support as the first move and then we will upsell them into the Gold level of the path or the licenses, and then we will broaden out the number of device being managed, so that’s the monetization strategy behind it.
It goes through multiple channels, the carriers, the distributors and our direct sales force. So you got to have to give us a little bit of time to understand that.
We have a model but we haven’t started that monetization effort yet. So all I could give you right now is kind of a model on our own.
So I think I should just refrain from just giving that. But in a quarter I will provide some of our early findings with that.
James Yersh
Okay. Ehud I think your last question in terms of ASP in the quarter, you threw a lot of the stats at us. But the one thing that I did pick up on you, you did say for example a 10% was associated with Passport in the quarter. I think you are high on that assumption.
Really the impact of ASP was driven by the end of life or near the end of inventory story for the legacy product. That was probably the biggest impact that had it there, I would say.
We do expect that to change going forward as nothing more… become more of the portfolio I would say because there is really nothing left of the old stuff.
John Chen
And the 200,000 for the ASP for Passport is actually not the correct figures because again I will remind you that we are on sell-through. So only a portion of the 200,000 actually is in the revenue number that you saw.
Ehud Gelblum, Managing Director and Head of US Tech Research, Citi.
Thank you, right. Okay, that’s very helpful. Is there update for the subscriber number.
John Chen
I’m sorry.
Ehud Gelblum
Is there a subscriber number update that we can hang our hat on?
John Chen
No, not right now.
Ehud Gelblum
Okay, thank you.
John Chen
Thank you.
Operator
We’ll go next to Simona Jankowski with Goldman Sachs.
Simona Jankowski, Senior Equity Research Analyst, Global Investment Research, Goldman Sachs
Hi, thank you. I just wanted to…
John Chen
Hi Simona.
Simona Jankowski
Hi, I just wanted to clarify something at first. I think you said in the press release and in the remarks that you expect P&L break-even at some point in fiscal 16. I think earlier you were talking about break-even or positive EPS for the whole fiscal 16. So just wanted to clarify that first.
John Chen
No, I meant — if I have said it, I apologize. That was just a little ahead of my own reading. Sometime in FY16 we will turn profitable. Our plan is once we turn profitable we’ll sustain it.
And so that was all.
And I didn’t really have a model with me. I don’t have any. I didn’t give any guidance of the entire FY16.
But Simona, I think I hope you know that this management team are very focused on making the bottom line. Last quarter we lost only couple of pennies a share, this quarter we made one.
I don’t think anybody should model that we are all of a sudden have these strong expenses that go off track. I don’t intend to be there. I can’t promise you that, but it is our intent to get to sustainable profitability as quickly as we can.
If for some reason that we were able to do it sooner. in the year. then of course you add everything together, than in FY16 we will be profitable. And that will be music to my ears. I at least committed to everybody that I’ll work hard at it, but I can’t make that promise.
Simona Jankowski
And then just the couple of question around the Classic. So you said that the purchase commitments were up quite a bit. Can you just clarify the Classic is manufactured with FoxConn and is it still on a variable cost model like what you had negotiated earlier or is there any kind of fixed element before these purchase commitments have to happen regardless of the sell-through of the product?
John Chen
No, it is on the same, exactly the same model, the manufacturing model, the cost model the variable cost model where we talked about. And yes, Classic is being manufactured by FoxConn.
Simona Jankowski
And then just lastly. You are guiding for an acceleration in the declines next quarter of the Service Access Fees. And presumably that’s accounting for an accelerated hardware conversion to the Classic. Can you just talk a little bit about what assumption is embedded there?
John Chen
Well you already said it. I mean we actually seen a 13%, and that’s probably a reasonably good rate, some balance between 12% to 13%. We’re just being conservative and add a couple of two three points more to it. We think that’s reasonable, as the Classic goes into the market.
And the Classic goes to the market, as you know, a lot of the 9900 Curve users are “dying for it.” And so that of course will then turn off the SAF for those individuals that upgrade.
The math obviously is, I’m not go to be providing you the margin of the Classic but it is a positive margin and revenue of course is in the $400 plus. And but then I lose $3 to $5 a month when that conversion happens. Sometime over the lifetime of this will crossover.
I mean I know I’m beginning to be more complicated than I sound but the point is this is why we assume this 15% decline, that’s it. There is no really big science behind it at this point.
Simona Jankowski
Yeah, okay. Great, thank you.
Operator
We will go next to Mark Sue with RBC Capital Markets.
John Chen
Hey Mark.
Mark Sue, Managing Director at RBC Capital Markets
Thank you. Hi John. Hi, I actually paid $349 for my Classic.
John Chen
Well, you were there at our lodge and you are the one of the lucky one. We won’t sell at $349 now.
Mark Sue
Okay, thank you. Maybe just recognizing that the revenues will come, what about the carriers promise to push and promote any devices. BlackBerry has had a lot of new devices and a lot of the success is predicated on just the push by the carriers.
Maybe also if you can weave in the qualitative comments by the enterprises?
And then James a quick one for you, as we move towards software, notably perpetual with your subscriptions, will you share with us some of the billings growth so that we have some tangible evidence that you can get to your software revenue growth in the future?
John Chen:
You want a crack at it?
James Yersh
Yeah, I’ll start. I think the short answer to that Mark is once we get to a different model, we will evolve our metrics and that seems like a logical one to get too.
John Chen
Yeah, so you’re talking about the bookings and the billing?
James Yersh
Yes, the bookings.
John Chen
The bookings end of it, okay. And once you get probably mid-year…
James Yersh
We’ll evaluate that.
John Chen
Okay, well the first question is the carriers.
Mark Sue
Yes, the dollars at the advertisements to push the products as opposed to just BlackBerry pushing and promoting?
James Yersh
Well for a lot of the flags, well, John went through the list of some of them. That have at least gone through testing and have committed to it. You saw a lot of those in the press releases Mark that we put out on Classic time.
I think the big difference here is we’re seeing a lot of support from these carriers also to put it in the retail stores and have a physical presence there which was a bit of a change kind of where we’ve been with the carriers recently.
So I think even with that in itself shows a lot more momentum behind Classic than we have for a lot of the portfolio recently.
John Chen
And I think Mark your question really is, are you aiming at whether the cost will also jump up on our part?
Mark Sue
John, it’s more on the service providers will say yes, we’ll carry it, yes we’ll push it, but then we don’t really see the ad dollars, we don’t really see the promotions, we don’t see the excitement from the carriers, so I’m just trying to see how different it might be this time around.
John Chen
Yeah, with the Classic, everybody, all the carriers I spoke to are very excited and they will put out the dollars. In fact, if I’m not mistaken, Bell, just sent out flyers to… for Christmas shopping. A number of stores in Toronto that my guys visited they told me that Classic was prominently displayed in the stores.
So maybe you should go to the stores. I know Telus and Bell and Rogers are spot on, on those and AT&T, as you heard the other day is committed to put in 2,200 retail stores. Vodafone in UK, I mean things are happening.
Now as you all know that over the last two years we had many challenges with the carriers and our distributors and this is why I named the distributors like, we have a lot of renewed interest and momentum with Ingram and Brightstar.
Things are happening. I’m encouraged that things are happening but I wouldn’t say that all things are well. I mean we still need a lot of work and a lot of attention and working well together and that’s what I’m spending most of my times on.
Mark Sue
And it also shows John you’re open to reengaging with carriers you have not done business with recently?
John Chen
Yes, absolutely, business is business. If they treat us respectfully, I would definitely do anything I can to reciprocate that.
Mark Sue
Thank you. Good luck.
John Chen
Yeah, thanks.
Operator
We’ll go next to Rod Hall with JPMorgan.
John Chen
Good morning Rod.
Rod Hall, Senior Analyst, Data Networking/Wireline/Wireless Equity Research at JP Morgan Chase
Hi guys, thanks for the question.
I just had a couple of things. I wanted to ask you guys about the old inventory unit number or the impact of ASPs, can you give us any idea what the clear out impact on the ASPs was, or what the unit numbers there were?
And then I also wanted to clarify on the gross margin. I think James you said you guys are internally modeling high 40s for the next couple of quarters but then I think it was part of Tim’s question, you said that the new units are going to drive better gross margins. So I’m just trying to figure out what are the puts and takes around the gross margin and why are you modeling high 40s two quarters out if you think the new products are going to drive better gross margins?
And then lastly can you give us any idea where you think channel inventory ends up in Q4? Thanks.
James Yersh
Okay so a lot there Rod. Let me start with the gross margins one.
I think the biggest difference that you have to account for quarter-over-quarter in the next couple is the decline in SAF.
As that happens it will be offset, as John has said, economically by selling these products but again that’s a very high margin, very high cash type of device that I think you need to account for in the model.
So going from 51 down to high 40s, you can almost explain it on the back of that as Passport and Classic continue to ramp.
Now on to the total impact of just the end of life portfolio deals on ASP, I don’t actually have a number to show what the impact was but effectively that’s probably the bulk of the change from where we were last quarter to where we ended up this time.
And in terms of channel inventory, overall with where we ended up, in terms of number of products in the channel from where we’re looking at we’re pretty flat from the quarter. So I think the channel’s pretty healthy to support the new product launches, Rod.
Rod Hall
So James, the absolute level the channel inventory next quarter roughly similar or you think it will be down somewhat?
James Yersh
I think it will be down somewhat as sell-through kind of outpaces, let’s call it the ramp of Classic and another quarter of Passport is the primary things, Rod.
Rod Hall
Do you have like any idea roughly what that might look like? 250,000 units down or more or less? Would you care to tell me what you think?
James Yersh
I think that’s a reasonable number depending on where we have the supply of Classic which is probably the biggest variable Rod. But it’s a reasonable assumption.
Rod Hall
Okay, all right.
John Chen
Yeah the channels are quite… I think right now the channels inventory are quite healthy and I’m comfortable with where we are.
Rod Hall
Hey John, one more question for you. I have been talking to buyers out there and there is this perception that you guys are, which I think is a wrong perception that you guys are financially less healthy than some of these other competitors like Good and so on. I mean are you running across that and how do you correct that out in the marketplace?
John Chen
I think that’s a great question, my friend, it’s a great question.
No I’ve not ran into that. The conversation really has changed since I’ve started. A year ago people were just worried that we’re not going to be around and even my friends who are decision-makers have said to me, “You showed up too late”, or “It’s too late”, or whatever.
As the year has gone by it’s completely different. The conversation I have with these people –the buyers — are very different. They want to know what the interesting things are. The only question they have is you going across too broad, I said no and here is the reason why.
Making money and generating cash have got to be the number one priority and this is what I’m pleased with all that this past quarter and we’ll continue to drive that forward because it is nothing that is more powerful than people would say, well financial, I would say, “What do you mean?”
I’ve got $3.1 billion of cash in the bank. I generate cash. I make money. I got fresh products. I’m not quite sure exactly what you meant by whether you have any concern of ours.
And it’s a short conversation, if it’s even a conversation. So I think, I hope you agree and maybe we’ll continue to exchange notes, that the perception should be changing, if not already.
Rod Hall
Yeah, okay. Thanks a lot John.
John Chen
Thank you. I think I only have time for two more because I got to run to the next meeting. How’s that?
Operator
All right we’ll go next to Amitabh Passi with UBS.
Amitabh Passi, Senior Research Analyst at UBS Investment Bank
Hi good morning. Thanks for squeezing me in. I just had a couple.
I guess James, the question for you was on the OpEx line. I think a couple of quarters ago you said that you thought the OpEx was at fairly healthy levels. You’re down $100 million I think in the last two quarters so I’m not worry about an uptick in OpEx I guess I’m just trying to figure out how much more should we expect OpEx to continue to decline?
And maybe when you answer than if you could also just help us understand the fixed versus variable component, because I am a little surprised it’s down another $100 million just in the past couple of quarters. And then I had a follow up for John.
James Yersh
Sure, in terms of OpEx I don’t think you can expect a significant decline from where we are. Ultimately we worked hard to make sure we get the right resources to support growth, and that they are aligned to the proper function, Amitabh, as John had talked about.
In terms of fixed versus variable, definitely something like amortization would be fixed and a little bit harder to influence, although we are focused on working with that. Headcount we talked about being through the reduction plans and so there is a definitely, that’s a fixed piece that we’re dealing with now. But we still do have a lot of discretionary spend.
In terms of a percentage we are skewed to salaries and benefits. So we do have some leverage, but again we have to plan to now support growth from where we are.
Amitabh Passi
Right okay.
And then John just a follow-up for you threw out a quite an impressive list of BES 12 customers, Tata, Boeing, Automatic, the whole bunch. Can you give us a sense, of just the scope of the deployment, are these are pilots, are they revenue paying customers, are you 100% the choice of EMM, or is that again a mixed environment? Just some context around some of these customer deployments for BES 12.
John Chen
Right, the stat that I have 70% of our customers, customers mean paying customers. The list I gave you are all paying customer, okay?
The ones that you mentioned Tata and McKenzie, and Automatic and all that, they’re all paying customers. And the stat I have is about 70% are on cross-platform, meaning that they are buying, they are using our EMM solutions on the iPhone and in iPads and the Android and other devices, in addition to the BlackBerry. So I think in a couple of cases where no BlackBerry is involved at all. So it seems like the wind is rather healthy.
Amitabh Passi
Okay, all right I appreciate it. Thank you.
John Chen
Thank you.
Operator
We’ll take our next question from Richard Tse with Cormark Securities.
James Yersh
Oh, hi Richard.
Richard Tse, Technology Analyst at Cormark Securities.
Hey! Thanks for getting me in here.
Listen, on your press release here you said 30% of licenses are from competing platforms. I just wanted to see if you guys could run through some of the main reasons why they are converting over here to your BES 12?
John Chen
Because, honestly it’s a much deeper and broader platform and we have a very healthy road map. A lot of people kicked the tires of the BES 12 and then security is probably the number cited reason for it.
Richard Tse
Okay and of your sub-base today how many would you say are Enterprise customers that are not necessarily on BES? Percentage breakdown.
James Yersh
In terms of mix, its that same as we have been talking about for roughly Richard 80% business users. If we stick with the 20% Enterprise, the answer to your question by math this would be about 60% then.
Richard Tse
Okay. So the 6 million is basically a very small number for what potential could be a huge base is that a fair assumption?
John Chen
The EZ Pass program, he was talking about… well the 6 million if you look at the number of BES, the Enterprise over paying customers in the sub-base is about 8 million to 10 million about that, when you add up all of the math. So 6 million and 30% of that are from competitors, so you take off that and the 4.7 million. So almost half of our base have upgraded. If that’s the metrics you are looking for.
Richard Tse
Okay all right, that’s great. Thank you.
John Chen
Thank you. Okay. Let me wrap because I am sorry I have to go and do my town hall meeting so I have all my employees waiting for me.
So I appreciate that you all tuned in for today. So I could summarize the fact that we are very proud of the fact we delivered a profitable quarter. Very positive cash flow.
We now have work to do on revenue and then we have got number of goal mentioned. We talked about that in hardware and software and value added service, QNX and the like and then we are going to talk about IOT at CES.
We’re also going to give you our BBM technology road map or CES for those people who are planning to join us and please do make sure you come and get the time and day and locations from our team.
And we’re also going to review our handset strategy at Mobile World Congress just like last year. We did the handset strategy review in last year and we’ll see in Barcelona. That’s I guess is the first week of March in Barcelona.
So with that, I wish you all a happy and safe holidays and thank you very much for tuning in.
Operator
And that concludes today’s conference call. Thank you for your participation.
